The headline of our day is the mortgage crisis in the U.S. In particular, a new term has entered our lexicon, the “subprime” mortgage. Of course, subprime simply refers to loans made to people with a relatively weak credit history; the free market economy solution to this problem is that those who are eligible for such a loan should pay a higher rate of interest, to reward the lender for the additional risk of non-payment they take on. This is a demand killer in this market, as those participants with poor credit are usually in that segment because of their limited ability to pay at normal interest rates, let alone penalty rates.
From an economics point of view, there is nothing inherently abnormal about the idea of higher interest following higher risk. What is interesting, excuse the pun, was the apparent real cause of the problem – teaser rates. In the mortgage market, this meant offering a low interest rate for a fixed period of time, say a year, followed by the rates rising steeply. Back to the point that lenders require a higher rate of interest to compensate them for the higher risk. Teaser rates have the opposite effect, signaling lower rates for higher risk to solve the demand killer problem we started this discussion around. You are a higher risk, but you get a cheaper rate – clearly a reckoning is coming and it takes the form of above market rates in later years, tied to an unknown, the monetary policy of the U.S.
If you have read this far you are probably wondering what on earth this has to do with NPS. It’s the teaser offer that interests us.
These kind of offers are not unusual. They are common in financial industries such as credit cards (a free balance transfer, or an introductory interest rate) but also any number of subscription services such as cable TV, mobile phones, etc. The pattern of Net Promoter Score (NPS) for this group of customers does seem fairly consistent based on our data and is worth discussion. Let’s say that there is a “true” NPS for one of these products. Recipients of the teaser offer typically demonstrate a higher NPS during the teaser period and then drop below the norm when the teaser expires. The “shock” of transition pushes them considerably lower, even into detractor status. The order of magnitude of both the switch and the delta from the true rate may result in the overall NPS being mostly a function of the percentage of customers who are in the teaser period.
Now this gets interesting when you understand the economics of this group of customers. Of course, this varies based on the product or service, but in at least a couple of recent instances we have been able to determine that the economics of this group is less attractive than that of the average customer. Perhaps even negative from a lifetime value standpoint.
Let’s run with that assumption for a second, as it makes some intuitive sense. At least some proportion of buyers attracted to teaser offers will not be attractive long term customers; they are simply seeking a below market deal and will switch whenever possible. Losses sustained on the teaser offer to recruit them are unlikely to be offset by their long-term custom, especially given their longer-term detractor status.
So this creates an interesting interplay of data. Want to boost your NPS? Recruit more teaser customers – it pushes your average score up. Destroy shareholder value? Do exactly the same. An inverse correlation where we are looking for a positive one.
Of course, if your management metrics are principally subscriber growth, without a good understanding of either NPS or lifetime customer value, that’s exactly where you might end up. To spot the trap, you would need to segment your NPS to filter out the effect of teaser offers and understand both the true rate of NPS and your propensity to buy short-term NPS scores with poor long-term NPS.
The business solution? Well, if the analysis points this way, you might want to seriously cut out teaser offers altogether. Or at the very least finesse the offer to the point where it makes both NPS and long-term economic sense. We have seen firms do both in practice, with short-term subscriber weakness and long-term profitability improvements either through better customer segmentation of customers or complete elimination of a customer segment.
There is an old saying that if you owe your bank $50k you are in trouble, if you owe them $150k then the bank is in trouble. I sincerely doubt that the biggest problem subprime lenders face is that they have a low NPS amongst their customers, although I don’t doubt they have such scores. It’s important to your business health that you understand the implications of buying NPS with bait – you might not like the switch.
